In January, the managing director of EcoMetrix Africa, Henk Sa, gave a presentation entitled Carbon marketing looking to the end of 2012 and beyond at the 5th annual Climate Finance & Carbon Markets Conference, which was held at the Sandton Sun Hotel. Sa discussed how companies can develop a Clean Development Mechanism (CDM) project in a post Kyoto environment and how the outcome of COP17 affects potential CDM project opportunities in different countries in Southern Africa.
“Many stakeholders in the African climate finance sector are asking what is next. My goal was to answer this question and give people the information they need to continue doing business in the carbon finance market,” said Sa, before adding that from a business perspective COP 17 could be considered a success, but there is still a lot of work that needs to be done.
To recap, some of the outcomes of COP17 include a legally binding deal which will be prepared by 2015 and take effect in 2020 (CDM infrastructure will be continued until 2015/2017); the governance framework for the Green Climate Fund was adopted (the fast-start funding of this fund was agreed upon and it encompasses USD$30-billion per year); and Carbon Capture and Storage (CCS) was included in the CDM – there is substantial project potential in Southern Africa, China and the Middle East for CSS projects.
The managing director of EcoMetrix Africa, Henk Sa.
Fragmented supply and demand in the absence of binding targets
“COP17 resulted in an extension of the current CDM infrastructure, but without new binding targets at a global level alternative markets on a regional and domestic level will drive demand. This will lead to a high level of market fragmentation,” says Sa.
“Alternative markets also come with alternative rules,” says Sa. “With the European Emission Trading Scheme, for example, there are specified technologies and a requirement of pre-2012 registration,” continues Sa.
It’s not only the demand side of the market that will be fragmented. “In the absence of a new global deal, the supply side of the market will also fragment according to country, economic rating, technology and other influencing factors,” explains Sa.
Due to the inconsistency in the rules of the different regional and domestic carbon markets, project developers in Southern Africa countries will have a number of alternatives to sell their carbon credits to in the post-Kyoto period. Sa gave a breakdown of what a few Southern African countries can do to generate carbon credits in the post-Kyoto era.
South Africa’s post-Kyoto CDM opportunities
Certified emission reductions (CERs) in South Africa from registered CDM projects or Programme of Activities (PoA’s), for example, can be sold in the European Emission Trading Scheme (EU ETS) provided they that are registered before the end of 2012. At this moment in time only a handful of CDM projects and PoA will meet this deadline which represents a substantial risk for South African project developers that assume they will be able to sell their CERs into the EU ETS only to find out later this year that the window to do so has closed.
Zambia’s post-Kyoto CDM opportunities
There are substantial reducing emissions from deforestation and forest degradation (REDD) potential to be sold into the Californian scheme (WCI) from 2013 onwards. PoA’s currently under registration could also supply the EU ETS, even if they weren’t registered before the end of 2012 as Zambia is considered a Least Developed Country (LDC).
Egypt’s post-Kyoto CDM opportunities
In Egypt, there’s a limited number of PoA’s to be registered before the end of 2012. CERs from registered CDM projects can be sold into EU ETS, excluding CERs from industrial projects (56% of total supply).
Nigeria’s post-Kyoto CDM opportunities
Nigeria’s existing CDM project portfolio offers substantial CER sales for the EU ETS post-2012. PoA’s registered before the end of 2012 can also be sold into the EU ETS.
Namibia’s post-Kyoto CDM opportunities
PoA’s currently under registration could be elevated to credited nationally appropriate mitigation actions (NAMAs) under the bilateral scheme with Japan.
“A key thing to remember is that market fragmentation leads to market arbitration, which will allow for price optimisation from the seller’s perspective,” says Sa.
“Market fragmentation and limited visibility regarding the future of the regulatory framework will reduce the ability to raise finances for your project against the carbon revenue stream. Matching the carbon credits with the right characteristics and prerequisites, such as technology and registration date, with the right market at the right moment in time will help you do business,” says Sa, before adding that timing is important.
“An example of planning your timing includes selling your carbon credits into the EU ETS in 2012 and 2013, into the WCI in 2014 and into the Australian ETS from 2015 through to 2017,” says Sa.
“Selling carbon credits is still the easiest part of the carbon markets and the production of carbon credits is still the hardest part, but understanding the different market dynamics will allow a seller to obtain the optimum price for credits,” concludes Sa.
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